Exclusion and Disputes Between Shareholders (SARL / SAS): What Solutions?

Disputes between shareholders are among the most frequent and most destructive in company law. The manager of a SAS (French simplified joint-stock company) who discovers that a co-founder systematically blocks shareholders' meetings, two equal shareholders in a SARL (French limited liability company) who no longer speak to each other, a minority shareholder who refuses to vote a vital capital increase: in all these cases, the company is paralysed even though it remains economically viable. The first question the client asks is almost always the same: “Can I exclude my fellow shareholder?” The legal answer is more nuanced than one might imagine. This article sets out the real conditions for excluding a shareholder, under the articles of association and the case law, and then the alternatives where the dispute durably paralyses the company: withdrawal, compulsory sale and judicial dissolution.

Understanding shareholder disputes and the disappearance of affectio societatis

A company rests on an element that the law calls affectio societatis: the shareholders' common will to collaborate on an equal footing in the corporate project. When that will disappears, a dispute between the shareholders sets in. It may take very different forms: refusal to hold meetings, systematic challenge to the accounts, blocking of strategic decisions, diversion of customers, a personal conflict between two founders that has become unmanageable.

Two situations that the law treats differently must be distinguished from the outset. A mere difference of views, even a sharp one, justifies no sanction: disagreement is not misconduct. By contrast, a dispute that paralyses the functioning of the company opens rights, notably that of applying for dissolution. Between the two lies the question of a shareholder's misconduct (unfair competition, misuse of corporate assets (abus de biens sociaux), breach of an agreement), which may found an exclusion if the articles of association so provide. The sources of conflict between shareholders and the procedures for resolving these disputes are presented as a whole in our article on disputes between shareholders.

The starting point of any analysis is therefore factual: is the dispute reciprocal or attributable to one particular shareholder? Does it genuinely block the conduct of business or does it remain a conflict between individuals with no effect on operations? The answer determines the choice between exclusion, withdrawal, compulsory sale and dissolution.

Excluding a shareholder: a principle that does not exist without a basis

Contrary to a widespread idea, there is no general right to exclude a shareholder in French law. Shareholder status is protected by the right of property in the shares. A shareholder can therefore be compelled to leave the company only if a statute or a clause in the articles of association expressly authorises it, and in strict compliance with the conditions laid down. Failing that, deciding at a meeting to “exclude” a shareholder has no legal value and exposes the company to annulment of the decision and to damages.

In a SAS: the exclusion clause in the articles of association

The simplified joint-stock company offers the most flexible framework. Article L227-16 of the French Commercial Code expressly authorises the articles of association to provide that a shareholder may be required to transfer his or her shares:

“On the terms that they determine, the articles of association may provide that a shareholder may be required to transfer his or her shares.”

This exclusion clause is the keystone of the arrangement in a SAS. It must still be drafted rigorously. An enforceable exclusion clause must specify at least:

• the grounds for exclusion, listed in an objective and verifiable way (carrying on a competing activity, criminal conviction, loss of an essential professional approval, change of control of a corporate shareholder, breach of an obligation under the articles of association)
• the body competent to pronounce the exclusion (general meeting, college of shareholders, president)
• the majority required and the voting arrangements
• the terms of repurchase of the shares and the method of valuing the price

Since Law No. 2019-744 of 19 July 2019 on the simplification of company law, the adoption or amendment of an exclusion clause in a SAS no longer requires the unanimity of the shareholders. It may be decided under the majority conditions provided by the articles of association. This relaxation greatly facilitates the introduction of an exclusion mechanism during the life of the company, whereas previously the targeted shareholder could block any insertion of such a clause.

In a SARL: the absence of a statutory exclusion mechanism

The situation is radically different in the SARL. No provision of law provides for the exclusion of a SARL shareholder, and this is the whole practical difficulty of excluding a shareholder from a SARL. The Commercial Code organises this faculty only in very particular cases unrelated to ordinary conflict (for example certain procedures linked to a change in share capital).

Inserting an exclusion clause into the articles of association of a SARL during the life of the company meets a major obstacle: such a clause increases the shareholders' commitments, which in principle requires unanimity. The shareholder whom one would like to be able to exclude one day will obviously not vote for a clause directed against him or her. In practice, exclusion in a SARL is therefore conceivable only if the clause was in the articles of association from the outset, which remains rare.

The concrete consequence: faced with a dispute between shareholders in a SARL, exclusion is rarely the right route. One must turn to negotiating a sale, an organised withdrawal or, as a last resort, judicial dissolution. This is why the initial drafting of the articles of association, or the adoption of a shareholders' agreement from incorporation, is decisive.

The judicial safeguards framing exclusion

Even where an exclusion clause exists and is valid, its implementation is closely scrutinised. The courts have identified several safeguards of public policy that the clause cannot set aside.

First, the targeted shareholder must be summoned and given the opportunity to present observations before the decision: respect for the adversarial principle is mandatory. An exclusion pronounced without the person concerned having been able to explain himself or herself may be annulled.

Next, it is accepted in French law that a shareholder threatened with exclusion retains the right to vote on the decision concerning him or her. A clause in the articles of association depriving the shareholder of the right to take part in the vote on his or her own exclusion was long held unlawful by the case law. This principle obviously complicates exclusion in companies with two equal shareholders, where the targeted shareholder can defeat the vote. The drafting of the clause must anticipate this difficulty.

Finally, the ground for exclusion must correspond exactly to one of those provided for by the articles of association, and the decision must not be diverted from its purpose in order to oust an inconvenient shareholder without good cause. The judge checks the reality and seriousness of the ground relied on. Exclusion is not a weapon for settling scores: it is a sanction of last resort, and a regulated one.

Shareholder withdrawal: organising a voluntary exit

Where exclusion is impossible or too conflictual, withdrawal provides a calmer outcome. Withdrawal allows a shareholder to leave the company and obtain repayment of the value of his or her shares.

An essential limit must nevertheless be stressed: in SARLs and SAS, there is no statutory right of withdrawal comparable to that recognised in civil companies (sociétés civiles) by Article 1869 of the French Civil Code. A shareholder of a SARL or a SAS can therefore withdraw only if the articles of association expressly provide for this faculty, or by amicable agreement with the other shareholders.

In practice, a negotiated withdrawal often takes the form of a repurchase of the shares by the remaining shareholders or by the company itself, together with an exit agreement settling the price, the payment schedule, the release of personal guarantees (bank sureties in particular) and a non-competition clause. For the shareholder who wishes to leave without destroying the working tool, this route is often preferable to long and uncertain litigation. For those who remain, it has the advantage of securing the continuity of operations. The conditions under which a SARL may repurchase its own shares by way of a capital reduction are set out in our article dedicated to this mechanism.

A well-drafted withdrawal clause in the articles of association specifies the conditions under which the shareholder may request his or her exit, the repurchase obligation that then falls on the other shareholders or on the company, and above all the method of valuing the price. It is this last point that most often crystallises the disagreement.

Compulsory sale and the valuation of shares

Whether the shareholder is excluded or withdraws, a central problem remains: at what price are the shares repurchased? In a period of dispute, the parties never spontaneously agree on a valuation.

French law has provided a protective mechanism: Article 1843-4 of the French Civil Code allows, where the value of shares whose transfer is provided for by law or by the articles of association is disputed, an expert to be appointed to fix that price. The expert's valuation is then binding on the parties, save for gross error. The expert is appointed either by agreement of the parties or by order of the president of the court.

Two points deserve the practitioner's attention. On the one hand, where the valuation results from a clause in the articles of association fixing a precise method, the expert must in principle apply that method: the expert cannot freely rewrite it. The drafting of the valuation clause (asset-based method, earnings multiple, average of several methods) therefore has a considerable financial impact. On the other hand, the date on which the value is assessed is a major issue: the value adopted is in principle that on the day the transfer takes place, and not that on the day of the dispute, which can make a significant difference depending on how the company has developed between the two dates.

A compulsory sale, backed by an exclusion clause in a SAS or by a withdrawal agreement, has a decisive advantage over dissolution: it preserves the company and its business. Only the departing shareholder changes, and the business continues. It is almost always the solution to prefer where the economic tool deserves to be saved.

Judicial dissolution for shareholder deadlock

Where the conflict is such that no negotiated exit is possible and the company is blocked, judicial dissolution becomes the ultimate recourse. This is the basis of dissolution for shareholder deadlock, provided for by Article 1844-7, 5° of the French Civil Code:

“The company comes to an end (...) by early dissolution pronounced by the court at the request of a shareholder for good cause, in particular where a shareholder fails to perform his or her obligations or where a dispute between shareholders paralyses the functioning of the company.”

This provision lays down two cumulative conditions strictly controlled by the judges.

First, there must be a dispute between shareholders, established and serious. A mere disagreement or a strategic divergence is not enough. The courts require a deep and lasting conflict to be demonstrated.

Second, and this is the most demanding condition, the dispute must paralyse the functioning of the company. Dissolution for shareholder deadlock is pronounced only if the company can no longer take the decisions necessary for its functioning: impossibility of holding meetings, blocking of the management bodies, accounts not approved, vital decisions impossible to adopt. A company that continues to function and to generate results, despite an execrable atmosphere, will not be dissolved: the paralysis must be real and not merely the mood.

The case law adds an important requirement drawn from the adage that no one may rely on his or her own turpitude: the shareholder who applies for dissolution must not be personally at the origin of the dispute. The judge rejects the application of a party who provoked or maintained the deadlock in order to obtain liquidation for his or her own benefit. This rule protects the company against the manoeuvres of a shareholder who would knowingly organise the paralysis.

Judicial dissolution is a radical solution and often economically destructive: it leads to liquidation, the sale of assets, the loss of jobs and the disappearance of sometimes considerable value. The courts pronounce it reluctantly where another outcome remains possible. It must therefore be presented to the client for what it is: a powerful negotiating lever as much as a real threat, rather than an end sought in itself.

Interim solutions: interim administrator and abuse of voting rights

Before reaching dissolution, several tools make it possible to manage the crisis, and sometimes to unblock it.

Appointment of an interim administrator

Where the dispute paralyses the management, a shareholder may ask the judge, in summary proceedings (référé), to appoint an interim administrator (administrateur provisoire). This exceptional measure requires two conditions to be met: circumstances making the normal functioning of the company impossible and an imminent peril to its corporate interest. The interim administrator temporarily takes the place of the managers to ensure continuity of operations and, often, to prepare a way out of the crisis. It is a transitional solution: it freezes the conflict without resolving it on the merits, but it avoids the immediate collapse of the business and leaves time to negotiate a sale.

Abuse of majority and abuse of minority

Disputes frequently lead to voting deadlocks that may be characterised as abuse.

Abuse of majority concerns a decision taken by the majority shareholders contrary to the corporate interest and with the sole aim of favouring the majority to the detriment of the minority (for example the systematic retention of all profits in reserves in order to deprive the minority shareholder of dividends with no economic justification). Such a decision may be annulled and give rise to damages.

Abuse of minority, symmetrically, penalises the minority shareholder who blocks a decision essential to the survival of the company (typically an indispensable capital increase) solely in his or her personal interest. The judge cannot vote in place of the minority shareholder, but may appoint an agent to vote in the interest of the company, and order the minority shareholder to compensate the loss caused. These characterisations are valuable weapons where the dispute takes the form of a systematic blocking of votes. On the procedure for obtaining the appointment of an ad hoc agent to unblock a corporate decision, see our analysis of abuse of minority.

Conclusion: saving the company rather than destroying it

Faced with a dispute between shareholders, the first reaction, excluding the other, is almost always the most difficult to implement. Exclusion requires a precise clause in the articles of association, realistic above all in a SAS thanks to Article L227-16 of the French Commercial Code, and almost impracticable in a SARL for want of a provision of law and given the unanimity required to insert such a clause. The position on the merits must be clear: in the vast majority of cases, it is better to organise a negotiated exit, withdrawal or compulsory sale with valuation by an expert under Article 1843-4 of the French Civil Code, than to let the company sink into dissolution for shareholder deadlock.

Judicial dissolution under Article 1844-7, 5° of the French Civil Code must remain what it is: a last resort, useful above all as a means of pressure to bring the opponent back to the negotiating table. Destroying the economic tool to settle a conflict between individuals is rarely the best solution, whether for the shareholders, the employees or the creditors.

The practical recommendation is twofold. For companies already incorporated: have your articles of association audited and, in a SAS, insert without delay an exclusion clause and an exit clause with a precise valuation method, while the climate still allows it. For companies being set up: negotiate from the first day a shareholders' agreement providing for the exit mechanisms, because these clauses are drafted effectively in cold blood, before any conflict.

Frequently asked questions

Can a shareholder of a SARL be excluded against his or her will?

In principle no, unless the articles of association contain an exclusion clause, which is rare in a SARL. No general provision of the Commercial Code authorises the exclusion of a SARL shareholder. Inserting such a clause during the life of the company in practice requires unanimity, because it increases the shareholders' commitments, so that the targeted shareholder can oppose it. Faced with a dispute, a negotiated sale or judicial dissolution are often the only realistic outcomes.

How can a shareholder of a SAS be excluded?

The exclusion of a SAS shareholder is possible only if the articles of association provide for an exclusion clause, under Article L227-16 of the French Commercial Code. The clause must set objective grounds, the competent body, the majority required and the method of repurchasing the shares. Since the Law of 19 July 2019, the adoption or amendment of this clause no longer requires unanimity. Implementation must respect the adversarial principle and, according to the case law, the voting right of the shareholder concerned.

What is a dispute paralysing the functioning of the company?

It is a situation in which the conflict between shareholders prevents the company from taking the decisions necessary for its functioning: meetings impossible to hold, accounts not approved, strategic decisions blocked, management paralysed. A mere disagreement or a bad atmosphere is not enough. The paralysis must be real and lasting to justify dissolution for shareholder deadlock under Article 1844-7, 5° of the French Civil Code.

Is dissolution for shareholder deadlock automatic?

No. The court has sovereign discretion to assess the existence of good cause and of paralysis of the company's functioning. It refuses dissolution if the company continues to function despite the conflict, or if the applicant is personally at the origin of the dispute. Dissolution being a radical measure leading to liquidation, the judges pronounce it reluctantly where an alternative solution remains conceivable.

How is the repurchase price of a departing shareholder's shares fixed?

Failing agreement, Article 1843-4 of the French Civil Code allows an expert to be appointed, by agreement or by the president of the court, whose valuation is binding on the parties save for gross error. Where the articles of association provide for a precise valuation method, the expert must in principle apply it. The value is generally assessed on the day of the transfer, which can significantly change the price depending on how the company has developed.

Can a shareholder of a SARL or a SAS withdraw freely?

No, there is no statutory right of withdrawal in SARLs and SAS, unlike civil companies governed by Article 1869 of the French Civil Code. Withdrawal is possible only if provided for by the articles of association or by amicable agreement with the other shareholders. In practice, the exit takes the form of a negotiated repurchase of the shares, framed by an agreement settling the price, the timetable and the release of personal guarantees.

What is an interim administrator for in a dispute between shareholders?

The interim administrator ensures continuity of management where the dispute paralyses the management and threatens the corporate interest. Appointment by the judge requires circumstances making the normal functioning of the company impossible and an imminent peril. It is a temporary measure: it freezes the crisis and preserves operations, until a solution on the merits, sale or dissolution, is found.